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PUBLISHED ONLINE: 4 APRIL 2016 | DOI: http://dx.doi.org/10.1038/nclimate2972
Web End =10.1038/NCLIMATE2972
Climate value at risk of global nancial assets
Simon Dietz1,2*, Alex Bowen1, Charlie Dixon2 and Philip Gradwell2
Investors and nancial regulators are increasingly aware of climate-change risks. So far, most of the attention has fallen on whether controls on carbon emissions will strand the assets of fossil-fuel companies1,2. However, it is no less important to ask, what might be the impact of climate change itself on asset values? Here we show how a leading integrated assessment model can be used to estimate the impact of twenty-rst-century climate change on the present market value of global nancial assets. We nd that the expected climate value at risk (climate VaR) of global nancial assets today is 1.8% along a business-as-usual emissions path. Taking a representative estimate of global nancial assets, this amounts to US$2.5 trillion. However, much of the risk is in the tail. For example, the 99th percentile climate VaR is16.9%, or US$24.2 trillion. These estimates would constitute a substantial write-down in the fundamental value of nancial assets. Cutting emissions to limit warming to no more than 2 C
reduces the climate VaR by an expected 0.6 percentage points, and the 99th percentile reduction is 7.7 percentage points. Including mitigation costs, the present value of global nancial assets is an expected 0.2% higher when warming is limited to no more than 2 C, compared with business as usual. The 99th percentile is 9.1% higher. Limiting warming to no more than 2 C
makes nancial sense to risk-neutral investorsand even more so to the risk averse.
The impact of climate change on the financial sector has been little researched so far, with the exception of some kinds of insurance3. Yet, if the economic impacts of climate change are as large as some studies have suggested46, then, because financial assets are ultimately backed by economic activities, it follows that the impact of climate change on financial assets could also be significant.
The value of a financial asset derives from its owners contractual claim on income such as a bond or share/stock. It is created by an economic agent raising a liability that will ultimately be paid o from a flow of output of goods and services....